Trading the markets requires money. Opening an account with any broker, you will have to fund it with a considerable amount of cash to make profits. Like any other industry, the markets need some initial investment. Most experts’ recommended balance to start trading is at least 10,000 USD in forex and 50,000 USD in the stocks. Many exchanges allow traders to deposit as little as 1 USD and leverage it up to 2,000, but such a small sum is useless as no healthy gains are achievable.
Most traders do not meet such a massive demand in trading capital. This is where prop firms come into play. However, many are confused about whether they should trade with these companies or use their own little money in the markets.
What is a prop firm?
Proprietary trading firms provide funding to successful traders who show consistent gains via proper risk management, psychology, and strategy. The people affiliated with these companies are known as prop or professional traders, while the retail trader is a term for those who trade their own cash. There may be many benefits to managing someone else’s money. It is necessary to give a deep thought before proceeding to get in the industry with prop firms or using your capital.
Using your capital
Following benefits can be seen when using your money to trade the markets.
- No profit split. One of the essential advantages that anyone will notice when using their capital is a no-profit split. Prop firms can take away as much as 60 % at the end of the month at the time of withdrawal. These companies make money by commissions, a desk fee, and taking a piece from traders’ gains. Retail traders, on the other hand, retain their hard-earned money 100%.
- Scrutiny. Retail traders do not have to go through a tedious selection process. Stepping into the markets is easy for them as they only have to open an account with a broker, verify it, and start trading.
- Trading styles and strategies. In prop companies, you may have to choose a strategy indicated by the firm that may or may not match your personality and trading style. Unless you are a pro trader who trades significant positions, the number of imposed restrictions might be huge. Retail traders don’t have such sort of limitations and are free to do as they please.
- Ease of trading. People who manage their capital have the benefit of comfort and ease. They are not bound to show up five days a week on the trading desk and can leave their trading as they please. Retail traders have much more personal flexibility as compared with institutional ones.
What should I look for when trading with my capital?
Trading with your capital is hard for many as you have to maintain your psychology at all costs. Under such mind-boggling circumstances, it is vital to get the best out of everything you can control. Choosing a good broker that is regulated, offers the lowest fees, and top quality customer service is crucial. It is also essential to manage your risk and strategy.
Trading with a prop firm
Proprietary trading may have a lot of advantages as compared with retail traders. Following benefits can be seen when working with a proprietary firm.
- Buying power. Huge capital is available to traders who trade with a prop firm. Many investors support these companies, and as a result, they always have more to offer for those who show good trading performance.
- Scaling plan. Proprietary companies have set up good scaling plans that increase the equity and overall buying power of a trader with consistent gains. Retail traders are limited to their original capital, which does not grow unless they deposit more money.
- Low fees. The trading fees that traders have to pay while managing capital have considerably lower margins compared with retailers. The trading volume of these firms is significant. Therefore, they can cut a deal with brokers to have low commissions and costs.
- Trading education. Prop firms always prefer an excellent trading outcome as better results mean they get more profits at the end of the day. They try their level best to teach traders and have gurus or mentors on the prop floor. It can be crucial to get a good teacher, especially when you begin your career in the markets. Retail traders are free to do whatever they want but can not ask questions and have to go through the problematic learning period by themselves.
- Best technology. The traders who trade at notable financial institutions have access to the latest and the best trading tools and platforms. The trading desk usually comprises more than one screen for scanning the charts efficiently. Ultra-low latency equivalent to 1 ms or even low is available in most cases. Traders usually have access to level two market data at this stage.
- Funding to traders with no money. For those who have no trading capital, prop firms can act as a life savior. Most online companies only demand a small fee to test a trader’s trading capabilities refunded with the first withdrawal.
- No risk. There is no risk to traders who trade alongside a prop firm as the company absorbs all the losses.
What should I look for when trading with a prop firm?
Make sure that you follow all their rules if you want to stay at their trading desk. Try online proprietary companies if you don’t like working in a fixed place. The profit split must be in your favor at the ratio of at least 70/30 with growth available in the future.
Trading alongside an institution does have lots of benefits when put side by side with retail. However, this does not indicate that you should select proprietary trading. It is necessary to shift yourself from local to prop firms slowly. Learn the financial industry by first trading through a retail broker, and then when you are qualified enough, go with the best agencies that look out for beginners and amateurs.